Fitch Rates LA State Univ's Sr 2016A&B Aux Revs 'A+'; Affirms Aux Revs & Lease Revs; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to approximately $138.2 million of auxiliary revenue refunding bonds, series 2016A, and approximately $16.4 million of auxiliary revenue refunding bonds, series 2016B (taxable), issued by the Board of Supervisors of Louisiana State University and Agricultural and Mechanical College (LSU).

The fixed-rate bonds are expected to price via negotiation on or about Nov. 1. Bond proceeds will refund all of LSU's outstanding series 2007 auxiliary revenue bonds, refund all outstanding series 2008 auxiliary revenue bonds, advance refund a portion of outstanding series 2010A auxiliary revenue and refunding bonds, and pay issuance costs.

In addition, Fitch has affirmed the rating on LSU's approximately $417.9 million outstanding auxiliary revenue bonds at 'A+' and $235.3 million outstanding lease revenue bonds at 'A'.

The Rating Outlook is Stable.

SECURITY

Auxiliary revenue bonds are limited obligations of LSU, secured by and payable from a pledge of gross auxiliary revenues. Auxiliary revenues are primarily derived from athletics, housing, parking and transportation, the student union, student health center, and university stores, although athletics and housing make up about three-quarters of the total.

Lease revenue bonds are limited obligations of the Louisiana Public Facilities Authority with LSU obligated to pay base rent and any additional rent solely from LSU's gross auxiliary revenues. Lease rental payments are subordinate to debt service of auxiliary revenue bonds. The lease revenue bonds are secured by a mortgage on the Nicholson Gateway mixed-use development project.

KEY RATING DRIVERS

SOUND AUXILIARY COVERAGE: The 'A+' rating on LSU's auxiliary revenue bonds reflects healthy demand for auxiliary services and continued sound coverage, which is offset by a high debt burden and pressure on the university's overall credit profile.

HISTORICALLY STEADY DEMAND: LSU's position as the state flagship institution for higher education and research has driven steady student demand resulting in auxiliary revenue growth and consistently solid coverage of auxiliary-related debt service.

UNIVERSITY CREDIT PROFILE: The university's fairly diverse revenue base, stable enrollment, adequate financial cushion, and manageable debt burden for the rating category provide some stability. However, consistently declining state funding contributes to negative operating margins on a full accrual basis. (Louisiana GOs are rated 'AA-' with a Stable Rating Outlook).

RATING SENSITIVITIES

DEMAND FLUCTUATIONS: Material enrollment declines that affect Louisiana State University and Agricultural and Mechanical College's ability to generate solid system auxiliary revenue bond coverage could lead to further rating pressure. Support for auxiliary enterprise-related debt service relies on stable enrollment.

COMPLETION RISK: The university's lease revenue bonds ratings may be pressured if project construction associated with the lease revenue bonds issuance is not completed on schedule. Liquidated damages provisions and fully-capitalized interest through January 2019 mitigate some completion risk.

LSU CREDIT STRENGTH: Continued operating deficits or a material increase in debt could negatively affect the auxiliary revenue and lease revenue bond ratings over time, given the interrelationship to the university's overall credit profile.

CREDIT PROFILE

Founded in 1853 and located in Baton Rouge, LA, LSU is the flagship campus of the Louisiana State University System. The university is comprised of 14 colleges and institutions offering 72 bachelors, 70 masters, 46 doctoral, veterinary medicine, and law degree programs. LSU is accredited by the South Association of Colleges and Schools (SACS), having been last reaccredited in 2015 for 10 years.

Steady headcount enrollment growth by 9.6% over the past six years to 31,527 in fall 2015 supports system operations, particularly as the state continues to reduce financial support. Freshman acceptance and matriculation rates are stable at about 77% and 42%, respectively. Graduate enrollment, too, is steady. Management reports that the August 2016 flooding in Baton Rouge has had a minimal impact on the university.

Fitch recently downgraded LSU's outstanding auxiliary revenue bonds due to pressure on LSU's overall credit profile and additional leverage as a result of the series 2016 lease revenue bonds issued in September 2016. The lease revenue bonds are subordinate to auxiliary revenue bonds, but the high debt burden may ultimately stress the university's overall operations.

The series 2016A&B auxiliary revenue bonds are fixed-rate, structured with level debt service, and on parity with outstanding auxiliary revenue bonds. The issuance is expected to produce net PV savings of approximately $20 million. Post issuance, approximately $8.6 million of series 2010A auxiliary revenue bonds will be outstanding.

For additional information, see Fitch's report on LSU dated Sept. 9, 2016.

Additional Disclosures: Fitch's rating relies on certain information provided by Raymond James, acting as underwriter.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012957

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012957

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Sahil Khera
Analyst
+1-212-908-0868
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Sahil Khera
Analyst
+1-212-908-0868
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com